You’ve done the hard work to solicit donations, earn grants, and run successful fundraisers for your nonprofit. As a result, you’ve grown your programs and established a significant rainy-day reserve fund. Congratulations! But don’t stop there. Now that you have the funds, you must manage them strategically.
Nonprofit investing is just as important (if not more so!) as the fundraising practice itself. And it doesn't have to be high risk, either. In this guide, we’ll walk through the basics of nonprofit cash management and investing and the necessary elements to start growing your giving strategically. We’ll cover the following topics:
- Nonprofit Investing FAQs
- Benefits and Importance of Nonprofit Investing
- How to Get Started:Steps to Nonprofit Investing
- Using Value Alignment Investing Strategies
- What to Look for in Your Nonprofit Investment Management Tools
When paired with valuable fundraising activities, a well-managed investment strategy can help nonprofits fund specific projects and reach long-term financial sustainability. Let’s dive in!
Nonprofit Investing FAQs
Historically, investment resources have not always been accessible or easy for nonprofits to understand, particularly for small to mid-sized organizations. High minimums and high advisory fees are often a deterrent. And while it’s more affordable to handle everything yourself, most organizations know best practices require an outside partner to take on a consistent fiduciary role.
As a result, many people have misconceptions and misunderstandings about the nonprofit investing process. Before breaking down the investing steps, let’s take a quick look at nonprofits’ biggest investing questions.
Can a Nonprofit Have an Investment Account?
Yes, nonprofits can have investment accounts, also known as brokerage accounts. In fact, as a part of good financial stewardship, you should have one.
As a registered 501(c)(3) organization, you are generally exempt from paying federal income tax on investment portfolio dividends and gains. Thus, a nonprofit’s investment account has built-in, money-saving value over those of for-profit businesses. Your tax-exempt status increases your overall return potential and allows you to change investments without significant tax implications.
Investment accounts can be used for low-risk, highly liquid strategies such as Treasury Bills and money market mutual funds in addition to growth and endowment-oriented accounts that include Index Funds and Bonds. Brokerage accounts are also used to receive stock donations which can grow high-capacity giving.
Can Nonprofits Invest in Stocks?
Like most organizations, nonprofits can invest in stocks, and many do as part of a well-rounded investment strategy designed to generate revenue to support their mission. Moreover, nonprofits can also invest in other types of assets, such as bonds and more conservative, highly liquid strategies like Treasury Bills, CDs, and money market mutual funds.
However, to avoid violating U.S. Securities and Exchange Commission (SEC) regulations, your investments should not benefit your nonprofit’s employees or board members. Note: this means board members should not be managing your funds or benefiting from them in any way. It's best to avoid any potential conflict of interest and find a third party who can support you as a fiduciary in your organizational goals. This also helps remove politics and brings in nonprofit expertise and guidance.
According to the IRS’s inurement policy: “A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests.” For example, your nonprofit shouldn’t buy stock in a board member’s company to help boost their earnings.
Can Nonprofits Buy Treasury Bills?
For a low-risk investment choice or in addition to investing in stocks, nonprofits can buy treasury bills or treasury bonds. These are some of the lowest-risk investments you can make because they’re fully backed by the US government if held to maturity. Treasury bills are rising in popularity for nonprofit reserves due to raising yield rates that are highly liquid and often bring greater returns than money markets and savings.
A Nonprofit Investment Advisor can buy a treasury bill at a set price, and then let it mature at a fixed rate of interest over the course of a few months (or years if you buy a treasury bond). Typically these are rolling portfolios that are automatically repurchased at the end of each yield. At the end of the maturity period or whenever you withdraw the funds, your nonprofit gets paid for the face value of the bill at that time.
If needed, Investment Advisors can also sell treasury bills for you on secondary markets in between yields. This way, the funds remain highly liquid, and you can typically access the cash in 3 business days. Treasuries are currently a popular opportunity for more risk-averse organizations that still want targeted growth.
Can a Nonprofit Invest in CDs?
Like other traditional investment options, nonprofits can invest in Certificates of Deposit (CDs) if they choose to do so. CDs are bank securities that remain at a fixed interest rate for a specific period. For instance, you might buy a CD with an interest rate of 3% and a maturity period of three years. In this case, your organization can only earn 3% interest and cannot access the funds for three years without penalty.
While CDs, mutual funds, and money markets are all low-risk cash reserve management options for nonprofits, CDs tend to be less flexible and less liquid. Additionally, they’re subject to the FDIC insurance cap of $250,000 per financial institution.
If your nonprofit chooses to purchase CDs with more than $250,000, we strongly suggest using a Certificate of Deposit Account Registry Service (CDARS) program so that all funds remain FDIC-insured. This program helps nonprofits easily distribute their investments across banks and accounts to get more than $250,000 in total FDIC coverage—without having to manage everything manually. Working with a nonprofit investment advisor like Infinite Giving makes the process easy.
Can Nonprofits Receive Mutual Funds?
We’ve mentioned that nonprofits can invest in and receive stocks, but what about mutual funds? The answer to this question depends on your provider.
Not every non-cash donation tool allows you to accept mutual funds, but Infinite Giving does. With our all-inclusive asset donation page, your organization can easily accept gifts of cash, stocks, mutual funds, crypto, and donor-advised fund (DAF) grants.
How do you Choose an Investment Advisor?
You (hopefully) wouldn’t hand your wallet over to just anyone. You need to trust the person holding your money and know they’d do their best to grow your investment. Similarly, be selective with where you invest your nonprofit’s funds.
Choose a Registered Investment Advisor (RIA) who meets SEC compliance requirements to mitigate risk. Unlike other types of financial advisors, such as broker-dealers, RIAs have a fiduciary obligation to act in your nonprofit’s best interest and offer you the lowest-cost products that meet your needs.
We also recommend finding an Investment Advisor who works exclusively with nonprofits. Your needs as an NPO vary greatly from personal or for-profit investment strategies so having an expert who can speak to industry standards and best practices, and make recommendations on policies and procedures as well as investment strategies is incredibly valuable.
How Much Money Does a Typical Nonprofit Have to Invest?
There’s no standard amount of funds a nonprofit has to invest, as this depends on individual financial situations and investment goals.
Ideally, experts recommend keeping 6 to 12 months’ worth of your organization’s operating costs in reserve—and as we mentioned earlier, it’s worth investing your reserve funds to avoid them losing value in a savings account. However, this isn’t a reality for many nonprofits, and anything is better than nothing. As you gain more financial sustainability, you can aim to invest 12 months to two years’ worth of operating costs.
You may need to set aside a certain amount of funding to open a brokerage or investment account. This amount can vary depending on the brokerage firm or investment solution, so be sure to research any requirements ahead of time to prepare.
Benefits and Importance of Nonprofit Investing
According to research from the MIT Sloan School of Management, only 11.2% of nonprofits hold investment accounts. That means nearly 90% of nonprofits aren’t putting their funds to work, hampering their ability to achieve their mission.
Many nonprofits have cash reserves in a simple savings account—however, these funds are unlikely to be fully FDIC-insured and are actively losing value against inflation. To truly build a sustainable organization, you should move from a scarcity mindset to an abundance mindset.
Just as nonprofits fundraise for different reasons, each will have specific goals for investing their reserves. Generally, the benefits of nonprofit investing fall into one of three buckets:
- Growing reserve funds: The first step to achieving financial sustainability as an organization is saving 6-12 months of operational reserves. This serves as your emergency fund if your revenue is impacted, such as if you lose a grant or a pandemic happens. In this sense, you can invest for the simple goal of long-term financial stability with unused reserve funds. High liquidity, low risk, and greatest returns should guide these decisions. A good Nonprofit Investment Advisor can help you shop for the best rates in money market mutual funds, Treasury Bills/Bonds, and even CDs.
- Courting large gifts: Major donors may look to your assets to confirm your financial health before donating. A healthy reserve fund invested wisely—especially one that readily accepts endowment and stock donations—can encourage large gifts by demonstrating how your nonprofit plans to use donations strategically for many years to come.
- Building assets: Especially if you don’t own much capital, funding a conservative investment portfolio can bolster your balance sheet and give your nonprofit more legitimacy while increasing buying power and impact.
Ultimately, your investment goals will depend on various factors, including your timeline, current assets, and regular fundraising behavior. They should also be guided by a sound Investment Policy Statement (IPS), which a Nonprofit Investment Advisor should create for you at no extra cost. Plan to address these goals in routine conversations with key stakeholders, your board of directors, and your Nonprofit Investment Advisor.
How to Get Started:Steps to Nonprofit Investing
Congratulations! We’ve made it to the point where you may be ready to start an investment account for your nonprofit. Below, we’ll walk step-by-step through what it takes to invest in your nonprofit.
Step 1: Develop a Nonprofit Investment Policy Statement
Before you invest, establish clear governance policies that address your investment account strategies and management policies. Nonprofits collect these policies in a document called a nonprofit investment policy statement (IPS), which is a roadmap for how an organization wants to invest its money. An IPS provides your Investment Advisor, board of directors, and team with guardrails for financial stewardship for your nonprofit.
Your IPS should be a simple document that can be passed to new board members as legacy members leave. You also should not need to pay an attorney to create these documents. A good Nonprofit Investment Advisor will help you work through one at no cost, and you can use templates like the one below to rework and edit as needed.
Your policy statement should include the following details:
- Roles of Investment Committee. Summarize the roles, responsibilities, and limitations of stakeholders (e.g., Board of Directors, Oversight Committee, and Executive Director) accountable for overseeing and managing a nonprofit’s investment portfolio.
- Investment Objectives. Define the primary goals for the investment portfolio, the long-term target rate of return, and the potential risk allowed.
- Investment Policies. List the types of investments allowed/prohibited and the target percentages of funds allocated to each type.
- Performance Measurements and Reporting Standards. Outline the standards and frequency by which the Board of Directors will measure and report on fund performance.
- Spending Policies. State all uses, benefits, purposes, and factors relevant to spending the nonprofit’s investment funds. Include guidelines for how, why, and when funds can be added to, withdrawn from, and reallocated in the investment account.
- Donor Restrictions. Clearly state that the investment committee agrees to all stipulations made by donors for how their funds are used and invested.
To make your life easier, download our free investment policy statement template to create your governance policies. However, resist the urge to fill this out and never think about it again. Your investment policy statement should be a living document that operates in conjunction with your strategic plan, bylaws, and statement of activities. Alongside your Board of Directors and your Registered Investment Advisor, continue to revise these statements as your nonprofit's needs and circ*mstances change.
Step 2: Decide Where to Invest
Once your nonprofit has a sound investment plan, decide on the provider and tools you’ll use to invest your money. While you may be most familiar with big bank investing, a new wave of modern Investment Advisors has led to an increase in access to sound investment strategies for small to mid-size nonprofits for reduced fees.
Let’s explore the benefits and drawbacks of each option.
Big Banks
For nonprofits of any size, big banks can offer a traditional investing experience. However, “traditional” isn’t always best. When deciding if a big bank is right for your nonprofit investing, consider that big banks:
- Don't typically have nonprofit expertise.
- Don't typically offer the best rates available.
- Require high fees to cover their overhead.
- Often have high minimums and aren't open to smaller nonprofit investments (under $10 million).
- Require extensive paperwork.
- Have long timelines to get things done.
- Put a middleman between you and your money.
- Can make fund transparency and access difficult.
- Lack an integrated technology platform.
Wealth Advisors and Brokers
Traditional brokers and wealth advisors offer another avenue for nonprofits looking for a typical investing experience. However, brokers are not fiduciaries—meaning that they can promote their own interests or the interests of companies when it comes to your investments.
When deciding if a traditional advisor is suitable for your nonprofit, consider that this option:
- Requires choosing a wealth advisor, which can become highly political and messy nonprofit board relationships.
- Involves long timelines and extensive paperwork to get things done.
- Usually has high fees (generally 1% or higher).
- Puts a middleman between you and your money.
- Can make fund transparency and access difficult.
DIY
While you can invest directly through Fidelity or Schwab, it's not considered a best practice for several crucial reasons. The clear positive is it cuts down on fees, but these banks still have high minimums and it also comes with great fiduciary responsibilities for nonprofits.
Volunteer board members who do this often have the best of intentions, but they’re still volunteers, meaning you end up with a lack of oversight, accountability, and transparency in DIY investing. There's typically a loss of consistency when board member terms are up or two professionals have differing opinions. It also opens up your organization to scrutiny from donors and relational fallout if mistakes are made.
Keep in mind that DIY investing:
- Can reduce advisory fees but can also be confusing and hard to understand.
- Gives you sole fiduciary responsibilities.
- May not offer you the reporting or performance metrics you need.
- Might involve potential conflicts of interest.
- Lacks consistent oversight as a result of limited board terms.
- Lacks a plan for addressing underperforming funds.
- Requires extensive expertise, time, and interest to take on creating and rebalancing the portfolio.
Money Markets and Savings Accounts
While money market accounts and savings accounts are often considered a relatively “safe” form of investment, the returns they generate are so low that your funds may be actively losing value due to inflation.
Funds that are held in savings accounts also run into FDIC insurance limits of $250,000. Bank failures do happen, and you want to limit your risk of holding over $250,000 per bank outside of your typical operating budget. The easiest way to lower your banking risk is to diversify into a brokerage account with a sweep program that increases your FDIC coverage (Infinite Giving’s brokerage accounts offer up to $5 million in FDIC coverage). This way, you can keep all your reserve funds in one account and ensure that all of your funding is insured.
When considering money market and savings accounts, remember that these funds:
- Are typically not FDIC-insured beyond $250,000.
- Offer high liquidity.
- Often require minimum balances with your bank.
- Generate some income, but little capital appreciation.
- Are not suitable as long-term investments.
- Will likely lose value over time due to inflation.
Nonprofit Investment Advisors
Nonprofit Investment Advisors take on fiduciary responsibilities and partner with nonprofit organizations as outsourced Chief Investment Officers (CIOs)—meaning they’re required to work in your organization’s best interest.
Due to nonprofits' reduced capacity for risk, Nonprofit Investment Advisors recommend a variety of portfolios, from mutual funds, CDs, and Treasury Bills to securities and bonds. They also often leverage Index Investing to bring you the greatest returns possible within the risk category you are most comfortable with.
Today, Infinite Giving is one of the only firms created specifically to serve small to mid-size nonprofits. We leverage technology, financial expertise, and decades of nonprofit experience to reduce overhead and bring nonprofits a modern investing and giving experience. Our Nonprofit Investment Advisors:
- Provide consistent fiduciary oversight.
- Aim to build your nonprofit’s wealth gradually over time and mirror the market.
- Have reduced and transparent fees.
- Offer FDIC coverage up to $5 million.
- Provide easy tools to grow asset giving.
- Offer quarterly board reports.
- Can provide returns greater than 90+% of active investment advisors.
- Bring high transparency and easy access to funds.
- Have a low minimum requirement.
- Offer an intuitive platform that brings all organization investment strategies in one place.
As you decide who to partner with to invest your funds, keep in mind that an Investment Advisor is the only option that serves as a true fiduciary for your nonprofit. They also typically offer much lower fees than big banks or brokers.
Step 3: Open a Nonprofit Investment Account
Once you’ve decided on your investment account solution, you’ll then open your account. To do so, you’ll need the following documents to prove your nonprofit status:
- An account application (with basic nonprofit information like your EIN and contact details)
- A copy of your Articles of Incorporation
- A copy of your 501(c)(3) IRS Determination Letter
- A copy of your organization’s bylaws
Gather these documents ahead of time so you can get up and running quickly. Depending on the method you use and who you choose to partner with, the application process can be completed in minutes or take weeks. For example, take a look at the differences between applying for a traditional brokerage account and an investment account with Infinite Giving:
Step 4: Boost Fundraising Capabilities
Once you have access to your account, the next step is to fund it with your cash reserves and leverage the account to raise additional funds.
Having an investment account can allow your nonprofit to accept and manage new types of donations easily—and nonprofits that accept non-cash assets can grow up to six times faster than their counterparts by appealing to untapped donor audiences. Non-cash assets you should consider accepting include:
- Stocks
- Crypto
- Donor Advised Fund (DAF) Grants
- Endowments
To make accepting these non-traditional donations easier, partner with a provider that offers streamlined, intuitive non-cash donation pages. Infinite Giving makes it easy for you to accept these donations and for donors to initiate a transfer right from your donation page.
Using Value Alignment Investing Strategies
Contrary to popular belief, there isn’t a single right way to invest your nonprofit’s money. Nonprofits can invest according to a range of strategies. Only you can determine which one is the right approach for your nonprofit.
In most cases, you want a strategy that protects the value of, grows, and allows you to access your assets. However, for those committed to a focused mission, you’ll likely also want a strategy that considers additional factors about where you invest your funds.
Let’s walk through the process of evaluating different nonprofit investment strategies and why they may be a good fit for your nonprofit. These include:
- Environment, Social, and Governance (ESG) Investing. This takes a step beyond value alignment to actively search out companies that align with the core ethics of environmental, social, and governance criteria. Environmental investing considers a company’s conservation practices, carbon footprint, pollution, and use of renewable energy. Social investing considers how a company treats its employees and customers, workforce diversity, labor conditions, and community involvement. Governance investing considers how a company is run, its shareholder treatment, the diversity of its board, the transparency in its accounting, and its political influence.
- Thematic Investing. This investing strategy allows investors to focus their investments on a specific theme or industry, such as faith-based organizations or companies with women in leadership. For example, a nonprofit committed to environmental justice might thematically invest in companies in the renewable energy industry.
- Impact Investing. This strategy focuses not on financial return but on making the largest measurable social or environmental impact. Generally, these investments are not available in the public market and are relatively illiquid.
Luckily you don’t have to choose between sacrificing your values and growing your funds—a 2020 report from Morgan Stanley found that sustainable fund portfolios outperformed traditional funds.
No matter where you invest your money, remember to consider your timeline, other sources of revenue, and risk tolerance. Generally, a longer timeline (e.g., investing for long-term savings) and more consistent cash flow (from recurring unrestricted gifts and grants) can open up additional investment for longer-term, higher risk, and less liquid opportunities.
What to Look for in Your Nonprofit Investment Management Tools
In addition to being able to accept nontraditional donations such as stocks, endowments, DAF grants, and crypto, your nonprofit investment management provider should offer a range of tools and solutions that make investing easy and effective. Look for the following in your provider:
- Low Fees. Researchers at MIT linked high nonprofit investment account advisory fees to lower returns. The study found a .17% decline in net returns for every one percent increase in fees. For best results, choose an investment manager with low, transparent fees.
- Access. Your provider should allow you to access your account at any time and quickly and easily withdraw funds.
- Security. To protect your money, your provider should be insured by the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC). Moreover, its technological products should offer security features such as two-factor authentication and data backup and encryption.
- Investment Options. Your provider should offer a selection of portfolios that align with your mission, values, and investment goals.
- Trusted Nonprofit Advising Services. You shouldn’t have to invest alone. Get expert advice from a Registered Investment Advisor with years of nonprofit expertise whenever you need it.
- Ease-of-Use. Ultimately, investing doesn't have to be a time-consuming and difficult activity. With the right tools and partner, it can be as easy as funding an account, setting your goals, and choosing a portfolio. Then, you can concentrate your days on achieving your nonprofit’s mission.
Ultimately, it doesn’t matter if you’re a big nonprofit looking to improve your investing strategy or a small one just beginning your investment journey. You deserve an investment solution made for your nonprofit by nonprofit industry experts.
Additional Resources
Want to learn more about investing for your nonprofit? Explore the following tools and resources:
- . Dive deeper into the steps to opening a nonprofit investing account, along with your options for doing so.
- Cash Management for Nonprofit Organizations: Basics + 8 Tips. Nonprofit investing is a crucial part of effective cash management. Check out this resource to learn more about managing your cash strategically.
- Nonprofit Reserve Funds: How to Manage Operating Reserves. Interested in sustainable nonprofit development? Learn about why and how your nonprofit should prioritize growing your reserves.
